Moody's comments on Solvency II QIS5 capital adequacy results

The QIS5 results were announced by the European Insurance and Occupational Pensions Authority in March 2011.

Dominic Simpson, a Moody's vice president and author of the report, said: "Specific companies are not cited in the results, but we believe those that did not participate at all and those that reported solvency coverage ratios below 100% are likely to be smaller entities with little business diversification. The results would seem to confirm our view that few of our rated insurers need to raise capital because of Solvency II implications.”

The average SCR coverage ratio is considerably lower than under the current regime owing to increased capital requirements, but the SCR is a much harsher test than Solvency I.

The results also provide some comparison between internal capital models and the standard formula and confirm Moody's view that large well diversified groups with robust and entrenched risk-management and internal models are best placed to transition to Solvency II.

However, the report notes that there are several aspects to the QIS5 exercise and results disclosure that require careful interpretation.

Mr Simpson explained: "The data had to be provided in a short time-frame, which could compromise its quality. Also, the test was based on year-end 2009 information and balance sheets could materially change by the introduction of Solvency II from 2013. Furthermore, QIS5 did not test risk-management requirements which for smaller, less sophisticated companies could prove a greater stumbling block than meeting capital requirements."

However, the report says that because EIOPA is in favour of reasonable transition measures, the chances for a relatively smooth crossover to Solvency II have improved, even though there is "unfinished business" in some areas, such as (i) valuation of technical provisions; (ii) a consistent definition of contract boundaries; (iii) the valuation of deferred taxes and (iv) expected profits arising from future premiums.